Stock Just $1.50 Away From a Breakout That Could Yield 45% Returns

StreetAuthority Network

With tax time less than one month away, if you're like many who prepare their own returns, you may be struggling to meet the April 15 deadline.

According to the National Taxpayer Advocate's 2012 Annual Report to Congress, about 40% of U.S. taxpayers file their own returns. However, with the new tax code, filing now may not be as simple as it was. Under the new code, some tax breaks were removed, others brought back, and a variety of rules were changed. These changes may drive more people to seek a tax preparation firm.

For industry giant H&R Block (HRB), consumers being potentially overwhelmed by tax code changes is great news.

Since 1955, H&R Block has done over 600 million tax preparations. Last year alone, the company prepared returns for 14.9 million in-person customers and 7.4 million online users.

Tax preparation is a lucrative business. In fiscal year 2012, ended in April, H&R Block reported annual revenues of $2.9 billion. This coming year, it expects to make over $3 billion in revenues.

The company is also trimming expenses by focusing on strategic store locations. This fiscal year, H&R Block will close 200 of its less profitable retail locations and 500 outlets operated in Sears (SHLD). It will concentrate on its 112 best-performing Sears outlets. This move, in addition to other cost-cutting initiatives, should help save $85 million to $100 million over the year.

While cutting its physical store presence, the company is expanding electronically. It now offers an online tax filing solution for the Apple (AAPL) iPad. Users can also complete a return via a video interface and instantly upload their documents for review by an H&R tax professional. Analysts from Zacks Investments believe the company's online growth could be as much as 14% this year.

Shareholders appear optimistic about growth prospects.

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H&R Block Stock HRB Chart

Since the beginning of 2013, shares have risen about 46%. And the technicals point to further increases ahead.

For much of 2011 to 2012, the stock traded in a narrow range, trapped by resistance around $16.50 and support near $13, creating a rectangle formation. In May 2012, the stock hit a low near support at $13.74. Bouncing off support, shares began to rise, forming a major uptrend. In late September 2012, shares broke important resistance, near $16.50, and the rectangle was broken out of to the upside.

The stock has been on a tear since. This January, a steep accelerated uptrend line formed. Aside from a brief period in February, shares have risen every week, to date. The stock is reapproaching its all-time June 2005 high around $29.

If this level can be successfully taken out, no historical resistance would be in sight. Based on the momentum the stock has exhibited so far this year, it's not unfeasible for shares to test $40 if $30 resistance can be exceeded.

The bullish technical outlook is supported by strong fundamentals. Recently, the company's CEO, William Cobb, stated industry filings are expected to increase approximately 1% to 2% over this year's tax season. On this upbeat expectation, analysts project strong gains for H&R Block's upcoming fiscal fourth quarter and fiscal year 2013 results, to be reported June 25.

For the fiscal fourth quarter, analysts expect revenue to increase 15.5% to $2.31 billion, from $2 billion in the comparable year-ago period. For the fiscal 2013 year, the five analysts following the company project increased demand, driven by filing changes in the United States, will push revenue up 3.5% to $3 billion, from $2.9 billion last year.

The earnings outlook is similar. Through cost-cutting, including shutting down less profitable outlets in Sears locations, analysts expect fiscal fourth-quarter earnings will rise nearly 30% to $2.65, from $2.04 in the comparable year-ago quarter. For the full 2013 fiscal year, analysts expect an increased customer base will help ramp up earnings over 30% to $1.67 per share, from $1.28 per share last year.

In addition to a strong fundamental outlook, the company offers an attractive forward annual dividend of about 2.8%, or $0.80 per share. The company has paid a dividend since it went public in 1962.

Risks to consider: As electronic filing increasingly becomes the standard way to prepare tax returns, H&R Block may need to beef up its security measures or risk losing clients. However, the company is aware of potential security violations and currently has a web section to inform clients how to protect themselves against identity theft. It should also be noted H&R Block is a largely seasonal play. The company's greatest profits are made during tax season.

Recommended Trade Setup:

-- Buy HRB at the market price
-- Set stop-loss at $18.89, slightly below the major uptrend line
-- Set initial price target at $39.98 for a potential 45% gain in six months

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